Paulson & Co. – a Victim of Redemptions?

Today news hit that John Paulson has finally sold a big chunk of his position in GLD. It is not terribly surprising that this happened in the quarter when gold made its low. After Paulson sold his holdings in bank stocks, the group soared, with many of the stocks he had sold at the lows rising by 200% and more therafter. However, this time it has probably less to do with his bad timing, but very likely more with the bad timing of investors in his funds. As the Bloomberg article mentions:

“Paulson & Co., the largest investor in the SPDR Gold Trust, the biggest exchange-traded product for the metal, pared its stake to 10.2 million shares in the three months ended June 30 from 21.8 million at the end of the first quarter, according to a government filing yesterday. The New York-based firm, which manages $18 billion, cut its ownership for the first time since 2011 “due to a reduced need for hedging,” according to an e-mailed response to questions.”

(emphasis added)

A friend reminded us that Paulson & Co. runs many funds that are denominated in gold. Any redemptions from these funds would therefore reduce the need for hedging. So it seems that Paulson's investors have cut their exposure to the gold denominated versions of his funds at exactly the wrong moment. This is actually something that always tends to happen near market lows. Apparently a number of other prominent hedge funds, including the Soros fund, also cut their exposure in the second quarter. So far they have all been wrong twice: first by holding on until the lows were made, and then by selling just as the market reversed and a rally started. As a matter of fact, we think it is a good thing these investors are gone. They were all late-comers to the gold bull market and their involvement has essentially proved to be a curse rather than a blessing. In fact, one should probably begin to get careful once they decide to get involved again, which is bound to happen at some point. In the meantime, these latest news may well contribute to a developing 'wall of worry' backdrop.

Gold Stocks – Technical Conditions Continue to Improve

In our last update we discussed the idea that the previous downside gap region in the HUI should begin to provide support if the recent advance was the 'real McCoy'. This appears to have happened and hopefully this time the support will manage to hold.

In addition, the HUI has in the meantime already advanced toward the 100-day moving average, which has not happened in a long time. A new MACD buy signal has been given as well. Last but not least, although this is written before the close of trading on Thursday, it appears as though the index may finally be about to make a higher high after putting in its first major higher low last week. This clearly represents a notable change in the market's character.

The HUI daily. The technical backdrop continues to improve – click to enlarge.

Below is another look at the HUI-gold ratio, which has broken its previous downtrend and continues to advance. Currently the ratio is close to a lateral level of resistance, but it seems likely that it will be overcome. An ongoing rise in this ratio is a necessary precondition for the continuation of the rebound.

The HUI-gold ratio – there are numerous positive divergences, and it appears as though it is finally overcoming its medium term downtrend line for good – click to enlarge.

Gold – Dips Are Getting Bought, Sentiment and Positioning Leave a Lot of Room for Further Improvement

Gold suffered another sharp dip early in Thursday's trading, but once again buying emerged in an area of near term support. Note the surge in trading volume near the intraday lows. The probability that resistance in the $1,350 area will fall is clearly rising – the more often dips elicit new buying and the more often the resistance area is tested, the more likely it will fall.

Gold December futures contract, 30 minute chart. The dip early on Thursday has attracted buyers. Volume near the low was strong, which is often a positive indication – click to enlarge.

Lastly, we want to briefly comment on recent developments on the sentiment and positioning front. The most recent commitments of traders reports show that big speculators are finally reducing their gross short positions in gold futures, leading to a slight increase in their net long position. The net long position had recently fallen back to levels last seen in 2005. Contrary to the widespread idea that an increase in speculative short positions is a positive, we hold that on the contrary, that bulls want to see growth in the net long position held by large speculators. This is so because this is the group that usually gets market direction right and the buying and selling of which is the major driver in the futures market. It only serves as a contrary indicator at extremes. Quite often it happens even near extremes that the large speculator category is beginning to take defensive action shortly before major highs or lows are reached (this happened e.g. in the silver market shortly before it topped in late April 2011).

Since recently a short term extreme in prices and positioning has in fact been reached, a change of opinion by this group of market participants would open the way for at least a major retracement rally. Here is a chart depicting the positioning of futures traders:

Commitments of traders in COMEX gold futures, via sentimentrader. Large speculators have finally stopped adding to their gross shorts and have begun to reverse the recent trend in positioning – click to enlarge.

Along similar lines, we find that the 'public opinion' chart – a composite of various sentiment surveys – remains at a very low level, just slightly off its recent lows. Should the recent rally prove durable, there would be a lot of negative sentiment that could be unwound and provide fuel for additional advances. Similar to the CoTs, negative sentiment is not a bullish indicator per se. It is contrarian only near extremes. Once a trend changes, it can help to support and magnify the new trend.

In other words, this will only be meaningful if a significant trend change is indeed in the works (the obvious caveat to this is that gold has yet to move above significant short term resistance). However, once one can be reasonable certain that a more durable trend change is indeed underway, it will of course be a good thing that the indicator is currently still at such a low level.

Gold, public opinion. If the market changes direction, there is a lot of room for sentiment to move from one extreme to the other – click to enlarge.

Conclusion:

So far, so good.

Addendum:

Shortly after we finished writing this update, gold has indeed broken out above the $1,350 resistance level. So a few of the above comments have already been superseded. If the breakout holds, there is likely going to be additional upside in the short to medium term.

Charts by: StockCharts, BarCharts, Sentimentrader

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3 Responses to “Gold and Gold Stocks Update – John Paulson Sells GLD”

There’s another side to the GLD redemption : it’s how the Smart Money, i.e. the Soros’ and the Paulson’s, arbitrage their way into physical gold. Soros has done this already, then bought that huge call position in GDX or GDXJ, can’t remember which. Paulson may just be doing the same.